Letter: Productivity Must Be Central Job of Central Bank

(Bloomberg Opinion) -- Re Ferdinando Giugliano’s column, " Jeremy Corbyn Has a Terrible Economic Idea" (June 25):

Giugliano dismisses the idea of a productivity target as among the worst “ever conceived for a central bank." He further writes that central banks “can do little to change the long-run rate of any economy’s expansion.” As such, a productivity target would cause inflation to “spike” because a central bank “would have to keep pressing on the monetary accelerator forever.”

This is wrong. With the correct tools, central banks can and should have a critical role to play in increasing the supply potential of the economy.

Indeed, Giugliano completely ignores the new role for credit guidance, as proposed in our report "Financing Investment." This tool can be used to influence both the pace of economic growth (macro-policy) as well as the distribution of lending (micro-policy). Does he really believe that productive investment in technology, and a shift in the distribution of bank lending towards high-value added sectors, will have no impact whatsoever on productivity?

The author warns that “The inflationary implications of such a plan might spook the markets.” Quite the opposite: technology-led investment will act as a positive supply shock, putting downward pressure on inflation.

Of course, had the report been read in its entirety, it would have become immediately clear that the 3 percent annual productivity target cannot be considered in isolation. Rather, it is part of a broader framework, which seeks to boost productive investment from both the private and public sectors.

The banks have not done enough to support companies in sectors that are critical to raising the productive potential of the U.K. economy. The Bank of England, as the steward of the financial system, is therefore central to the productivity debate.

The Bank of England would not be straying from its areas of “expertise and responsibility.” If central banks are not experts in the nexus between finance and investment, then who is? They should be experts in productivity too -- the single most critical variable for their monetary policy decisions. It is for this reason that we welcome the appointment of Jonathan Haskel to the BOE’s Monetary Policy Committee.

Britain does indeed have an entrenched productivity problem. That is precisely why an ambitious target is required. U.K. labor productivity growth averaged 3 percent a year in the 50 years to 1995. We should aim to get back to this rate of increase.

For Giugliano, a productivity target “runs against pretty much everything economists believe should be the role of a monetary authority.”

This is the essence of his argument: a productivity target is a bad idea because it doesn’t fit the main central banking policy framework of the past 20 years. However, time and time again, it has been shown that one inflation target does not suffice to deliver prosperity. The status quo didn’t serve us well before the 2007/08 housing crisis. It certainly won’t help as we navigate Brexit and rapid global innovation, which threatens to leave the U.K. trailing well and truly behind.

Graham Turner
June 27, 2018

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